The Directed Trustee Loophole

“On the one hand, fund companies are hired by plan sponsors – and required by law – to create menus that serve the interests of plan participants. On the other hand, they also have an incentive to include their own proprietary funds on the menu, even when more suit­able options are available from other fund families.”     From Are 401(k) Investment Menus Set Solely for Plan Participants, by Poole, Sialm, and Stefanescu, Center for Retirement Research at Boston College

The following is a link to the above cited brief that is based on a forthcoming study in the Journal of Finance: http://crr.bc.edu/wp-content/uploads/2015/08/IB_15-13.pdf   The brief highlights something that I think we have all understood to be true (?) but is either overlooked or has just been accepted.  

The study shows mutual fund companies – and I would also argue insurance companies - have an undue influence on the use of their proprietary funds.

“Where mutual fund companies serve as plan trustees – indicating their involvement in the management of the plan – additions and deletions from the menu of investment options often favor the company’s family of funds. More significantly, this bias is especially pronounced in favor of affiliated funds that delivered sub-par returns over the preceding three years.”

Interestingly all of the mutual fund companies would be serving as a directed trustee and would claim (particularly in court) to have no fiduciary responsibility - that the plan sponsor is “making all decisions.”

So how is a Directed Trustee, as a limited purpose fiduciary with a duty of loyalty to the participant and their beneficiaries, allowed to unduly influence investment selection in a way that would put their interests ahead of the participant? Tough question, but I’ll give it a shot.  “Conflicted” is in the eyes of the beholder.  In other words, a directed trustee has free reign, for the most part, to be compensated via revenue sharing payments (ABN AMRO Letter) and/or offer proprietary funds in the investment menu because (although a fiduciary) the directed trustee has no discretion over plan assets.  Thus, the argument is made that, while there may very well be a conflict of interest, it wasn’t the directed trustee’s decision to select XYZ investment manager, it was the plan sponsor’s— therefore, no conflict with ERISA fiduciary standards on the part of the directed trustee.  The following language from the DOL Advisory Opinion 97-15a [Frost Model] spells it out:

“…it is generally the view of the Department that if a trustee acts pursuant to a direction (i.e. is directed) in accordance with section 403(a)(1) or 404(c) of ERISA and does not exercise any authority or control (i.e. discretion) to cause a plan to invest in a mutual fund, the mere receipt by the trustee of a fee or other compensation from the mutual fund in connection with such investment would not in and of itself violate section 406(b)(3).  Note: Emphasis added along with parenthesis

Unified Trust is a Discretionary Plan Trustee – not a Directed Trustee.  Under 403(a), the discretionary plan trustee “shall have exclusive authority and discretion to manage and control the assets of the plan “with a duty of loyalty” and no conflicts of interest.  Subsequent language allows an “escape clause” for the trustee. This language says that to the extent the trustee is directed by the plan sponsor or other named fiduciary they are not responsible for the management of plan assets. This is where the term “directed trustee” comes from. This loophole has been widely used by most vendors giving the appearance of a loyal fiduciary with no conflicts.

If a plan sponsor was truly aware of the difference, which do you think they would choose?

-    A Discretionary Plan Trustee who has a duty of loyalty and no conflicts of interests…like Unified Trust?  

Or 

-      A limited purpose Directed Trustee?

Revenue Sharing - What's the right way to apply it in a 401(k) Plan?

In order to understand the question of how to apply Revenue Sharing in a 401(k) plan, it begs explanation as to what Revenue Sharing really is, what form it takes and how it's commonly applied.  In short, revenue sharing typically takes the form of basis points (bps) built into the underlying expense ratio of certain mutual funds, collective investment funds or annuity sub-accounts (referred to herein as "funds").  Not every fund has revenue sharing, but many do.  

Ex.) The Vanguard S&P 500 Index Admiral Share Class (VFIAX) costs 0.05%.  There isn't any revenue sharing in this fund.  Whereas, the Dodge & Cox Income fund (DODIX) costs 0.43%, but contains 0.08% (8 bps) of revenue sharing, making the underlying net expenses, 0.35%. 

Both of these funds are considered very good or excellent by most methods of evaluation, yet one has excess revenue built into it and one does not.  So what is this revenue?  Why is it there? What should a plan trustee do with it since it is a plan asset?

Revenue sharing came about as an industry concern as technology advanced in the late 1990's.  It comes in various forms or names.  Some of these names are Sub Transfer Agency (Sub-TA) fees, shareholder servicing fees, finder's fees or even 12(b)-1 fees which are typically used to pay brokerage commissions.  

If one were to look back at what the 401(k) product landscape looked like in the mid and late 1990's, it would be observed that there were two dominant types of products.  The first, is the Group Variable Annuity, where the investments were sub-advised funds, and the second was a mutual fund product offered by a mutual fund company containing only their mutual funds.  These "proprietary products" were often recordkept by that insurance company or that mutual fund company's transfer agency.  Transfer agencies are required by the investment industry and act as the record keeper for such things as share-lot accounting, tax basis, customer information and the like.  Transfer agencies are not revenue generating centers, rather they are a cost center to the investment houses.  They are financed by a ledger transaction on the fund company balance sheet called a 'Transfer Agency Fee' or a TA Fee.

During this period of time, technological systems and customer demand necessitated the creation of 'Multiple Fund Family' products, a predecessor to true open architecture.  These products still exist today.  Typically, this type of product would be distributed by a group of fund families partnered together.  Ex.) 8 fund families, 400 funds. Arguably, this is better than one fund family's 40 fund product on its own.  Often these products would only include those funds typically distributed by brokers for a commission (so no Vanguard, no DFA, etc.), and it is here that we find the birth of Revenue Sharing as we see it today.

Technology gave rise to "independent" record keeper service providers.  These record keepers were independent of the fund families, and often had superior technology and the ability to link together investment trading for multiple fund houses.  They took over the fund companies role as transfer agent for the 401(k) clients.  This freed up the aforementioned TA Fee for these types of accounts.  It didn't take the fund companies long to realize that this TA Fee could become an incentive to the record keepers for priority shelf space, similar to having a sugary cereal at eye level for a seven year old to see.  This incentive became the SUB-Transfer Agency fee (Sub-TA).  This was/is a legal practice, but it did have some systemic abuses.  In the following 5-15 years it was mainly a hidden secret of the retirement industry.  It was really in the mid-late 2000's when it gained notoriety, and then with the advent of the fee disclosure rules, primarily 408(b)-2 it became more widely known.

All that said, revenue sharing can be a good or bad thing.  It has its place in the fiduciary decision tree on the mechanics of paying for necessary services.  The question now shifts away from discovery of the existence of revenue sharing in the funds in a plan to how to properly allocate this revenue sharing.  

The Department of Labor (DOL) has been somewhat vague on this.  The 'Frost Letter', DOL Advisory Opinion 97-15A is the best guidance the industry has and essentially says that if a provider is a plan fiduciary, that it cannot retain revenue sharing received from funds and that it must credit it back to the plan.  This avoids any potential Conflict of Interest in the form of Self Dealing.  Okay, fair enough.  We, the fiduciary, pick a fund, it has revenue sharing, we collect it and give it back to the plan.  That makes sense.  Hey DOL, so how do we give it back?  In other words, what is the appropriate method?  The DOL is silent on this issue.  

Last year, in DOL Advisory Opinion 2013-03A, the DOL had a chance to illuminate the industry on what is the appropriate allocation method and, specifically, it opted not to; saying "this letter also does not address any fiduciary issues that may arise from the allocation of revenue sharing among plan expenses or individual participant accounts . . .”   Leading ERISA Attorney, Fred Reish reminds us that the method of allocation is a fiduciary decision and must be prudently considered by the responsible plan fiduciary (http://fredreish.com/advisory-opinion-2013-03a/).

The argument some in the industry make is this. Since only some funds have revenue sharing, while others do not, and revenue sharing is experienced as a cost by those who invest in those funds, but not experienced by participants who don't invest in those funds, shouldn't the revenue sharing be rebated back ONLY to those participants who experienced it as a cost?  Sounds right.  That's how other rebates work in other industries.....however, common industry practice is for revenue sharing to offset provider costs. If these costs are not offset, they would've been passed to ALL of the participants prorata.  Some providers don't give the plan trustees the option.  Some do.  Some providers provide a gross invoice that is then offset by revenue sharing and then give the client the choice to write a check on the net invoice or pass it to the participants.  

Some providers have shifted to the "participant-level" revenue sharing rebate process.  This then begs the question of when?  When is it applied, daily, monthly quarterly, annually?  What if the amount expected to receive differs materially from what is actually received?  How does one collect and then apply the difference?  Are their earnings adjustments required, if so who pays for those?  Could plan discrimination issues arise, benefits, rights and features issues?  All these are valid questions.  The issue of application of revenue sharing has now become a differentiating issue for providers, i.e. a product feature issue that can be sold or sold against.

After reading Fred's blog post linked above, he mentions forewarned is forearmed.  Rather than this becoming a potential fight one needs to be armed for, how about this instead?  As a challenge to the DOL, PLEASE COME UP WITH A 'SAFE HARBOR' METHOD ON HOW TO APPROPRIATELY ALLOCATE REVENUE SHARING WHEN IT EXISTS WITHIN A 401(K) PLAN!!!!  This would sure solve a lot of unnecessary problems or potential future problems.



     

DOL - the 2014 Pipeline!

In case you missed it, recently the DOL published a list of initiatives for 2014.  It was written about in an article from Plan Adviser magazine, linked here.

http://www.planadviser.com/DOL_Issues_2014_Retirement_Plan_Pipeline.aspx

As a summary of this, here are the eight items on the DOL’s published agenda for 2014 that impact ERISA Retirement Plans (as opposed to IRAs, Health Plans, 457 plans or non-ERISA 403(b)s).

1.) Fiduciary Re-Definition – Targeting August 2014 – This will continue to be an argument.  NAPA and ASPPA are against fiduciary standard in its current form, which has (in their opinion) too many exceptions resulting in a “non-uniform, uniform fiduciary standard”.  An article on NAPA.net today indicates that the DOL is lobbying pretty hard to get this done this year.  Time will tell.  Article linked here:

http://www.napa-net.org/news/managing-a-practice/regulatory-compliance/perez-lobbying-congress-on-fiduciary-rule/?id=6661&tkn=940127217506af86e247cd&mqsc=E3713559&utm_source=WhatCountsEmail&utm_medium=NAPA_List+Napa-Net%20Daily&utm_campaign=NAPA%20Net%20Daily

  

2.) Lifetime Income Illustrations – Targeting August 2014 – DOL is still interpreting comments.  Seems like this idea has legs behind it despite some of the obvious deficiencies in the accuracy of calculations.

3.)  Review use of Brokerage Windows in Partic. Directed plans – This could be a big deal, and will be the one that I’m most interested in.  As many of us in the industry know and agree, the use of individual brokerage in plans has a TON of problems, hopefully they’ll make this restrictive enough that they will mainly go away.

a.       Explore whether and to what extent regulatory guidance on fiduciary requirements and safeguards for such arrangements are appropriate (b/c they could be problematic) – RFI expected in April of 2014

4.)  408(b)(2) amendments coming requiring providers to provide a guide to understanding or a similar tool to help sponsors, especially small ones to understand this guidance – notice of proposed rule making (NPRM) in January – Great idea, but I suspect that the tools created will be too difficult for clients to use, or some other such problem so that most providers can continue to hoodwink the clients on what they are truly paying

5.)    Reduction in Safe Harbor afforded to selection of Annuity option in individual account plans to only cover the idea that the provider has the ability to make lifetime payments (not as to quality of annuity or provider) – October 2014

6.)    DB funding notice finalizing – March 2014

7.)    Amendment to Participant Disclosures surrounding Qualifed Default Investment Alternatives and Target Date funds under 404a-5 – looking for more specificity – March 2014 – More written disclosure that will go unread and not understood by participants.  This is a huge waste of energy and resources.

8.)    QTA – Qualified Termination Administrator – Looking to create to deal w. issue of abandoned plans, similar to using a bankruptcy trustee – April 2014 for final rule
 

Trends for 2014, and beyond!

The year is coming to a close and, frankly, while excited for what lies ahead, I'm saddened to see the end of 2013.  2013 proved to be another great year both on a personal and professional level and while I reflect back on all of the success we've been having, I remind myself to be mindful of what lies ahead, 2014! 

As we transition past the legislative issues that have been bogging down the industry (MEP's, Fee Disclosure, fiduciary definition, etc.), the industry finally starts to put service improvement at the forefront.  In this article, published in Employee Benefit News, author Robert Lawton highlights five trends that he seems coming for 2014 and beyond and, candidly, I agree with him!

1.) Simple, simpler, and simply simplify!! - Plans, that is.
2.) More Target Date fund and/or managed account usage for participants.
3.) Focus on outcomes
4.) Retirement Readiness - Seems like tied to #3 to me.
5.) Shift from cost reduction and into monitoring

Below is a link to the complete article.  I hope Mr. Lawton has a perfect Crystal Ball.

http://ebn.benefitnews.com/blog/ebviews/top-5-401k-plan-trends-2014-2738237-1.html

"Plain English" in 408(b)-2 disclosures, hah, I've got a bridge I can sell you too!!!!

Every once in a while, someone else does my job for me.  In this case, I'll give the credit to the Wall Street Journal for saying in writing what many of us have been saying in person for quite some time now.  The attached article highlights a problem with the recent 408(b)-2 disclosures mandated to be distributed to Plan Sponsors (employers) earlier this year. 

http://professional.wsj.com/article/SB10000872396390444024204578044422783570446.html?mod=djemITP_h&mg=reno64-wsj

The gist of the article is this.  Many of the industry service providers weren't explicitedly clear in the way they disclosed their fees on the mandated 408(b)-2 disclosures despite that the rules have been very clear that they are to be written in "Plain English".  What a Shock!!! 

The article points towards Wall Street for burying the Plan Sponsors under a mountain of fine print, which is more of the same from what they've always done as the provider referenced in the article estutely points out.  However, to be fair, this wasn't really Wall Street as a whole.  There's probably less than 100 major retirement plan service providers out there and most are insurance companies, mutual fund companies or independent recordkeepers.  Let's keep the blame pointed squarely where it belongs. 

To expect an industry comprised of asset gatherers to be forthright in telling their clients they've been overcharging them for years unapologetically would be counterproductive to their goal, gathering assets.  It is very unsurprising to this author, that vendors are doing as little as possible to make fee clarity just that, clear. 

Kudos for WSJ for writing what a lot of us have been thinking.

Self Directed Brokerage Window Brou Ha Ha!

Well,

It took a few weeks, but the industry made enough noise about FAQ 30 from the DOL's May 7th release of FAQ's pertaining to Fee Disclosure.  This author posted on June 6th that our interpretation of this FAQ is that it made it effectively impractical for Self Directed Brokerage Accounts to exist in plans of any real size.  Phyllis C. Borzi, assistant secretary of labor for DOL's Employee Benefits Security Administration (EBSA), said June 18 at the SPARK National Conference that a second set of FAQ's will be forthcoming after July 1st some time.


At the same conference, she did discuss FAQ 30 and basically stated that the industry was overreacting to it and that the spirt of it is that plan fiduciaries must have policies in place to monitor investments and ensure prudence.  See below for an article that discusses the dialogue.

http://www.bna.com/borzi-addresses-concerns-n12884910110/

Our interpretation of the FAQ remains the same.  Ms. Borzi's comments simply reiterate what we feel which is that Self Directed Accounts can still be used in plans, but from a practical perspective can become a very difficult investment choice because of the need to monitor the underlying holdings.  When these brokerage accounts are not in a vendor window, but rather are scattered among various/many brokers it can be a near impossible task for any plan with a substantial number of brokerage accounts.

Fee Disclosure FAQ's, some thoughts on Fee Disclosure - Are Brokerage Accounts on Death's Doorstep?

O.k., so if you're in the Retirement Plan business, you are aware that in a few weeks (July 1st) all the new Fee Disclosure Rules will be in effect.  In early May, the DOL published Field Assistance Bulletin 2012-2 (FAB 2012-2) which is intended to be an FAQ document to aide with all the specific situations that may come up regarding complying with 408(b)-2 and 404a-5.....at least all the situations that they could come up with at this time...LOL.  Below is a link to the bulletin.

http://www.dol.gov/ebsa/pdf/fab2012-2.pdf

Among the more interesting of these FAQ's are Questions 29 and 30 which deal with Brokerage Windows and Self Directed Brokerage Accounts (SDA) in plans.  Specifically, in relationship to Participant-Level Fee Disclosure what is asked is whether Brokerage Windows and Accounts are covered under the regulation.  The short answer to this is yes, they are covered under this regulation. 

However, in my best layman's terminology, what it says is that the SDA window must properly provide disclosure of all potential fees that may exist in that investment structure, but NOT the underlying investments held inside the account.  I.E. The SDA is not considered a Designated Investment Alternative (DIA)

Ex.) If there is an Administrative Fee - like $1000/year or if there are transaction fees, those must be made available for the participants, but if the participant invests in a mutual fund inside the window, that mutual fund doesn't necessarily need to separately comply with the disclosure rules.

Seemingly, this could create a loophole of sorts.  Like having a plan exclusively investing in SDAs and then investing in securities within those windows without any fee disclosure compliance for those securities.....not so fast!!!

In Q30 of this bulletin, what it says is that if a "significant number of participants and beneficiaries" invest in the same underlying security within the brokerage window, that this security would be considered a DIA and be subjected to the 404a-5 Fee Disclosure rules.  So this begs the question, what is the definition of "significant number"?  Later on this bulletin they reference 5 participants or at least 1% of the participants (for plans w. more than 500 participants) as that number.

Based on this stipulation, it led me to consider the following questions.

Q1.) If the uptake at the participant level for the brokerage window is 4 participants or fewer, are we to assume that the DIA questions in the SDA would be a moot point b/c of the reference to five participants or more?


A1.) More or less, yes, although not necessarily moot.  A Plan Sponsor will still need to monitor this and ensure that it is less than five and that in general Prohited Transactions are still being prevented.

Q2.) If the answer to the first question is yes, only worry at five or more, what type of SDA examination procedures needs to be put in place to ascertain whether commonality of holdings exceeds the 5 participant or more threshold? If it does, how does a Plan Sponsor gain proper 404a-5 coverage if that holding is an individual security?

A2.) Theoretically, procedures could be established to monitor these accounts looking for and observing any commonality of holdings.  However, from a practical perspective who is really going to do this?  Certainly not most Plan Sponsors, and it seems a daunting task for any administrative professional to do it either.  It would seem especially difficult in scenarios where the participants aren't in a window, but rather are using their own brokers at different broker dealers. 

DOES THIS MEAN THAT SDAs ARE EFFECTIVELY......DEAD MAN WALKING??  Time will tell, but our interpretation is that yes, for any plan of size with many SDAs, they are no longer practical to have.

Q3.) If the Plan Sponsor does have that policy in palce to properly monitor these (LOL), what happens when the security is an individual stock or bond (ex., Facebook Stock).  How does the stock provide a 404a-5 disclosure? 

A3.) Not likely to happen or be done correctly. 

Q4.) If this 5 or more rule is a rule, what can a firm do to put a policy in place to keep it at five or less without bumping against Non-Discrim. Issues?

A4.) There really is no way to put a restrictive policy in place without potentially running into Benefits, Rights, Features issues, i.e. Discrimination.


So that was a long way to go for this author to conclude the following opinion.  The new Participant Fee Disclosure rules, Rule 404a-5, has effectively mitigated the usefulness of the Brokerage Window in ERISA plans. 

Personally, that makes me happy on some level.  Now we'll see if this is what actually happens over time.

Final 408(b)(2) Regulations - Final is Final....about time!

Well, today is the day that the Interim tag was taken off the 408(b)(2) regulations and they have become final. In my first perusal of the rules, the biggest change seems to be the timing. The Interim rule was to be effective April 1, 2012 and that has been pushed back to July 1, 2012. The 404(a)(5) disclosures, i.e. participant fee disclosures, was also tied to this effective date so those are also pushed to July 1, 2012. Everyone gets a little more breathing room.


Other major changes I've observed is the exclusion of certain 403(b) Annuity Contracts and custodial accounts, an expansion of the information required to be disclosed and updates to how disclosure of changes are to be made.


Attached is the actual regulation and the DOL's fact sheet on the guidance.


Full Rule

http://www.ofr.gov/(X(1)S(q03r5lzzov2yvhmrvo4qlk5m))/OFRUpload/OFRData/2012-02262_PI.pdf



DOL Fact Sheet

http://www.dol.gov/ebsa/pdf/fs408b2finalreg.pdf

An Oldie but a Goodie - Criminal Rule, listen up Bank Lenders!

This is an oldie but a goodie. The story goes like this, Plan Sponsor of a 401(k) Plan receives a call from their Bank. Specifically, it is from their lender. The Loan Officer, subtley or maybe not so subtley, tells the client that their credit is at risk if they don't put more assets with the bank. Subsequently, a broker (bank registered rep) is introduced and a few short months later the 401(k) Plan is moved to the bank or a different spin where the credit isn't at risk, instead the client is told that their rate will be reduced in exchange for the plan.

For those of us practicing in the ERISA Qualified Plan arena, this story or one like it is very familiar. We all competed against this type of scenario and we all know that it isn't legal. I've often cited that this is a Prohited Transaction (PT) and violates several different ones. Well, thanks to a linked in post that led me to this blog post from the Business of Benefits (nice one Mr. Toth) we can all now specifically cite the US Criminal code when this scenario presents itself. http://www.businessofbenefits.com/2010/06/articles/complex-prohibited-transaction/erisa-plans-ultimateand-criminalprohibited-transaction-rule-of-18-usc-1954/

To summarize the post, this behavior violates ERISA's Prohibited Transaction rules, but it also violates the US Criminal Code, specifically, 18 USC §1954. It specifically is an Anti-Kickback rule and is broad in nature although it does specify ERISA plans that

Whoever being—
(1) an administrator, officer, trustee, custodian, counsel, agent, or employee of any employee welfare benefit plan or employee pension benefit plan; or
(2) an officer, counsel, agent, or employee of an employer or an employer any of whose employees are covered by such plan; or
(3) an officer, counsel, agent, or employee of an employee organization any of whose members are covered by such plan; or
(4) a person who, or an officer, counsel, agent, or employee of an organization which provides benefit plan services to such plan

receives or agrees to receive or solicits any fee, kickback, commission, gift, loan, money, or thing of value because of or with intent to be influenced with respect to, any of the actions, decisions, or other duties relating to any question or matter concerning such plan or any person who directly or indirectly gives or offers, or promises to give or offer, any fee, kickback, commission, gift, loan, money, or thing of value prohibited by this section, shall be fined under this title or imprisoned not more than three years, or both.

Many scenarios could fall under this, but specifically, the act of Tying a company loan to the 401(k) Plan would fall under this. So, sometimes we need to look past ERISA to the Criminal Code itself to find something specific. I wonder if the banks have contemplated that this, technically, should be disclosed as compensation under 408(b)-2.......

Thanks Linked-In and thanks Mr. Toth for the good intelligence.

What!!! For a change, apparently No Delay on Fee Disclosure

In a shocking move by the DOL, they've actually held firm on the Fee Disclosure Deadline!

http://www.benefitspro.com/2012/01/06/dol-says-no-extension-on-fee-disclosure-deadline

This is despite that fact that with approx. 3 months to go they still have not issued the final guidance needed for the variety of different service providers to all comply.

In this author's experience, this is typical. The Fee Disclosure rules, both 408(b)(2) and 404(a)(5) have been around for several years now and it would seem to me that all of the relevant issues have been discussed and vetted ad nauseum, so one would think that final guidance would have been here long before now. But, that is the problem with the regulating bodies. They claim to be sympathetic to industry concerns, but alas not so concerned that they would give industry enough time to implement changes to be in compliance.

Ethically/Morally, we've always been in favor of Fee Disclosure (see former blog posts on the subject) but we remain skeptical that the newly "informed" consumer, i.e. the Plan Sponsor and Participants will either be better off with this new information or outraged by it. Frankly, we believe it very possible that harm will be caused in the form of fewer participants saving money and more plans becoming out of compliance.

In fact, we think it is likely that a whole bunch of Plans that were previously in compliance with ERISA (teh heh....) will now be out of compliance and in many cases be engaging in Prohibited Transactions unknowingly. What remains to be seen is whether or not any of this will actually be enforced. In the meantime, as Samuel Jackson once said in the movie Jurassic Park.... "Hold onto your Butts!"

DOL Officially extends fee disclosure....again....

In a notice on its website, the U.S. Department of Labor announced the extension of the applicability date of the fiduciary-level fee disclosure regulation issued under ERISA section 408(b)(2) until April 1, 2012. The Department had previously proposed to extend the applicability date only until January 1, 2012.

The DOL also announced an amendment to the applicability date of the participant-level fee disclosure regulation. Initial participant-level disclosures must now be made no later than 60 days after the first day of the plan year beginning after November 1, 2011; or if later, 60 days after the effective date of the fiduciary-level fee disclosure regulation.

Previously, the Department had proposed a 120-day transition period to provide the initial participant disclosures. The final rule is available here. http://www.dol.gov/ebsa/pdf/extensionofapplicabilitydatesfinalrule.pdf

and a fact sheet for it here. http://www.dol.gov/ebsa/newsroom/fsimprovedfeedisclosure.html

This delay doesn't change our views on the matter. Ultimately consumers should know what they pay for all goods and services and Plan Sponsors who are engaged in a trust arrangement, which all Qualified Plans are, further have an obligation to determine the reasonableness of a contract or arrangement.

In the absense of knowing all compensation arrangements, how can one determine that an arrangement is reasonable? The delays, nonetheless, are frustrating, another small win for the lobbyists.

Surprise! Another Delay - Fee Disclosure Revisited....again...

Over the last year or so, we’ve been keeping tabs on the rules surrounding fee disclosure in all of its forms current and newly proposed. Specifically, the new proposals are the final 408(b)(2) disclosures and the Participant fee disclosure rules under ERISA §404(a)(5). The 408(b)(2) rules have been delayed twice and are currently due to come into effect on January 1st, 2012. In a filing just published at the Federal Register, the U.S. Department of Labor has officially proposed the previously discussed extension for those 408(b)(2) regulations. The Federal Register filing formally effectuates that intent.

The new announcement in this filing is that the DOL stated it would propose an amendment to the participant level fee disclosure regulation which would provide a 120-day transition period (instead of 60 days) to provide the initial participant disclosures. However, it does not appear there will be any extension provided for quarterly expense disclosures. According to the DOL release , a calendar year plan would have to furnish the initial participant disclosures no later than April 30, 2012. The quarterly expense disclosures required by paragraphs (c)(2)(ii) and (c)(3)(ii) of the regulation (e.g., quarterly statement of fees/expenses actually deducted) would have to be furnished no later than May 15, 2012.

In essence, this gives the service providers an extra quarter to get into compliance. Not a big deal, but worth noting as in previous posts we referenced Q4, 2011 and now it will be Q1, 2012.

Strong Words from EBSA Regarding 408(b)(2) Compliance

Fil Williams of the DOL's EBSA recently stated at the Mid-Atlantic Benefit Conference on May 5, 2011: “…for those employers to whom the new Section 408(b)(2) rules do apply, responsible plan fiduciaries ultimately will be obligated to terminate contracts or arrangements with service providers that do not comply.”

Even though the DOL has aready postponed the final 408(b)(2) regulations once, they are scheduled to become effective January 1, 2012. This along with the new participant disclosure regulation (effective in November 2011) will make for a busy Thanksgiving, end of year, for retirement plan services providers.

An associate of ours at Unified Trust, Pete Swisher, recently published a column in the ASPPA Summit Newsletter addressing the regulations and six ways to prepare your practice by November. It is available by clicking here.

Coming Soon.....Participant Fee Disclosure!!!! Get your helmets on....

What exactly is it that get’s Retirement Plan Professionals, advisors and service providers alike, so worried about when it comes to Fee Disclosure? That’s a bit rhetorical, as I suspect the answer is mostly obvious for those who read this blog. In the last year or two, the anxiety level regarding fee disclosure has been quite apparent. As a clarifying point for those who are unaware, there are TWO sets of fee disclosure rules. The implementation date of one of these, commonly referred to as the 408(b)(2) fee disclosure rules, has been postponed to 01/01/12 (at the time of this writing), and perhaps will be again. The other set of rules are the new rules under ERISA §404(a)(5), commonly referred to as ‘Participant Disclosure’. These rules are going to be effective for the 4th Qtr. of 2011, right around the corner. Surprisingly and confusing to me, even though these are the more difficult set of rules, these seem to be the one’s that fewer practitioners are worried about.

The 408(b)(2) rules are getting a lot more industry attention, perhaps this is due to how much the industry has historically done to disguise fees, that it is going to be incredibly difficult to accurately show clients how to follow the money trail. Perhaps it is because this is the rule that makes Broker/Dealers and Insurance Company’s a little squirmy due to that little requirement where the service providers have to declare if their acting as a fiduciary or not. Whatever the reason is, the practical reality is that some difficult discussions (and maybe decisions) will happen between service providers and clients. But this is a difficult business, and I believe that ultimately most of the good practitioners will get through it with most of their client relationships intact.

However, participant disclosure……that’s a whole other scenario, and it’s happening first!!!! This article, by David McCann from CFO Magazine does a good job of thousand footing the situation.
http://www.cfo.com/article.cfm/14570384/c_14570395

I, and most practitioners I know believe that the majority of participants have no idea what the retirement plan costs are and many think that they are getting a free benefit, that they pay nothing for their 401(k). This is a systemic issue. Most 401(k) mouse traps in the market, historically, have been designed to disguise fees from the participants. The group annuities (and Collective Funds) unitize the investments and thus are embedding fees into the unit prices. Many mutual fund platforms are often registered rep distributed, and their compensation is in the expense ratio, but also built into share prices, not to mention implicit revenue sharing arrangements. Even environments where the fees are deducted as line item expenses from participant accounts will often not be explicitly disclosed. For the participant to discover these charges, they will have to search for these deductions online in the form of a customized transaction report.

As a result, the new participant disclosure rules will 100% create a HUGE amount of phone calls, complaints to everyone and anyone associated with creating and managing their plan. Frankly, I think, it will cause a large quantity of plans, big and small, to search out new providers. For proactive practitioners, this is absolutely an opportunity. Advisors who aren’t in front of this are going to have to back pedal as the business owners and CFOs start getting questioned by staff. As Mr. McCann says in his article……..consider yourself warned!

Final 408(b)(2) Regulations postponed......briefly

Just last week, February 11 to be exact, the Department of Labor announced that it intends to extend the applicability date for service-provider fee disclosure rules under section 408(b)(2) of ERISA. Disclosure requirements will now apply to contracts or arrangements in existence on or after January 1, 2012, rather than July 16, 2011.

At this point, nothing other than the effective date has changed. All covered service providers will still be required to provide extensive disclosures about their services and the compensation they expect to receive as well as identifying their fiduciary status.

This delay was made solely so that The Department of Labor can review the public comments that they requested previously in connection with the interim final rule, including comments on the types of service providers who should be covered and on whether the required disclosures should be presented in a standard format or not, and subsequently to allow time for implementation of any changes made based on those comments.

While this extension is sure to be welcomed by certain service providers, it isn't likely to provide any type of reprieve. For those hoping for the "good old days" to come back,.....well there's always hope.